The Case for Owning Gold – A Primer
In an era of fiat currencies, money printing, and inflation, gold remains one of the few financial assets that has stood the test of time as money.
For any asset to be considered money, it must fulfil three functions:
- A unit of account – allowing goods and services to be priced consistently.
- A store of value – preserving purchasing power over time.
- A medium of exchange – facilitating trade.
Gold has met these criteria for millennia. In ancient Rome, an ounce of gold could buy a fine-quality toga. Today, one ounce of gold can still buy a high-quality suit, demonstrating its enduring ability to preserve purchasing power.
Gold as a Store of Value
The U.S. Civil War offers a lesson in the dangers of unbacked paper currencies. To finance the war, the U.S. government introduced the greenback in 1862, a paper dollar not backed by gold or silver. As more notes were printed, its purchasing power diminished, causing severe economic distress.
As Andrew Dickson White observed:
“Never was there a more perfect demonstration of the truth asserted by Daniel Webster, that, of all contrivances for defrauding the working people of a country, arbitrary issues of paper money are the most effective.”
Recognizing the economic instability caused by fiat issuance, Congress passed the Resumption Act in 1875, restoring the dollar’s redeemability for gold by 1879. Once again, paper money was "as good as gold".
Gold as a Medium of Exchange
Gold is unique in that it carries no counterparty risk. Unlike paper money (or its digital version), it is not dependent on a government to maintain its value. Once purchased, gold can be exchanged for any currency worldwide, reinforcing its role as a global financial asset.
By contrast, today’s government-issued currencies are irredeemable—they cannot be exchanged for any real asset. While governments set legal tender laws, they do not control the gold market—and they cannot print gold.
Why the Law of Diminishing Returns Does Not Apply
Most goods follow the Law of Diminishing Returns—the more you consume, the less additional benefit you receive. For example, the first meal when you're hungry provides immense satisfaction, but by the fourth or fifth, the value of another plate of food drops significantly.
Gold, however, does not behave this way. Unlike consumer goods or even productive assets, its role as money remains constant regardless of how much is accumulated. More gold does not dilute its utility—if anything, its monetary function strengthens as demand increases.
Conclusion: The Modern Case for Gold
From ancient Rome to modern economies, gold has outlasted every fiat currency ever created. As J.P. Morgan famously stated:
“Gold is money, everything else is credit.”
Unlike paper assets, gold has intrinsic value, requiring real effort and resources to extract from the earth. It cannot be printed or manipulated by central banks, making it a safeguard against monetary debasement.
In an era of high inflation and record-breaking money supply expansion (i.e., QE programs by virtually all Western central banks), the case for owning gold has never been stronger. Governments continue to print ever-increasing amounts of paper currency—whether it’s dollars, euros, yen, or pounds—gradually eroding their value.
Until this trend reverses, gold remains the ultimate hedge.
